==============================================================================
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
----------------------
FORM 10-Q
----------------------
(X) QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended March 31, 1996
( ) TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from ______ to ______.
Commission file number 1-10717
E-Z SERVE CORPORATION
(Exact name of registrant as specified in its charter)
Delaware 72-2168773
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
2550 North Loop West, Suite 600, Houston, TX 77092
(Address of principal executive offices, including ZIP code)
713/684-4300
(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months, and (2) has been subject to such filing
requirements for the past 90 days. Yes X No
--- ---
Indicate the number of shares outstanding of each of the issuer's
classes of common stock, as of the latest practicable date.
---------------
Common Stock $.01 par value: 69,076,530
(Number of shares outstanding as of May 10, 1996)
=============================================================================
PART I. FINANCIAL INFORMATION
Page
Item 1. Financial Statements (Unaudited)
Consolidated Balance Sheets
March 31, 1996 and December 31, 1995 3
Consolidated Statements of Operations for the
Three Months ended March 31, 1996 and March 26, 1995 5
Consolidated Statements of Stockholders' Equity for
the Year ended December 31, 1995 and Three Months
ended March 31, 1996 6
Consolidated Statements of Cash Flows for the
Three Months ended March 31, 1996 and March 26, 1995 7
Notes to Consolidated Financial Statements 8
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 14
PART II. OTHER INFORMATION
SIGNATURES 23
2
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements
--------------------
E-Z SERVE CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(Unaudited)
(In thousands)
March 31, December 31,
1996 1995
--------- -----------
ASSETS
- - ------
Current Assets:
Cash and temporary investments $ 9,346 $ 15,759
Receivables, net of allowance for doubtful accounts 9,603 9,136
Inventory 36,335 37,078
Environmental receivables 13,828 13,828
Prepaid expenses and other current assets 2,457 2,783
-------- ---------
Total Current Assets 71,569 78,584
-------- ---------
Property and equipment, net of accumulated
depreciation 143,592 143,144
Environmental receivables 32,511 32,428
Other assets 6,496 6,419
--------- ---------
$ 254,168 $ 260,575
========= =========
The accompanying Notes to Consolidated Financial Statements
are an integral part of these Statements.
3
E-Z SERVE CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS (Continued)
(Unaudited)
(In thousands)
March 31, December 31,
1996 1995
--------- -----------
LIABILITIES AND STOCKHOLDERS' EQUITY
- - ------------------------------------
Current Liabilities:
Trade payables $ 26,046 $ 28,958
Accrued liabilities and other 26,086 28,127
Current portion of environmental liability 14,049 14,057
Current portion of long-term obligations 7,358 5,794
--------- ---------
Total Current Liabilities 73,544 76,936
--------- ---------
Long-Term Obligations:
Payable to banks 76,100 74,450
Payable to related parties 25 25
Obligations under capital leases 1,332 1,389
Other 304 318
Environmental liability 29,657 30,043
Deferred income taxes 3,661 3,661
Other liabilities 3,175 3,593
Commitments and contingencies - -
--------- ---------
Total Long-Term Liabilities 114,254 113,479
--------- ---------
Stockholders' Equity:
Preferred stock, $.01 par value; authorized
3,000,000 shares; 75,656 shares Series C
issued and outstanding at March 31, 1996
and December 31, 1995, respectively 1 1
Common stock, $.01 par value; authorized
100,000,000 shares: 67,866,159 and 67,854,159
shares issued and outstanding at March 31, 1996
and December 31, 1995, respectively 679 679
Additional paid-in capital 55,124 56,340
Retained earnings subsequent to March 28, 1993,
date of quasi-reorganization (total deficit
eliminated $86,034) 10,571 13,140
--------- ---------
Total Stockholder's Equity 66,375 70,160
--------- ---------
$ 254,168 $ 260,575
========= =========
The accompanying Notes to Consolidated Financial Statements
are an integral part of these Statements.
4
E-Z SERVE CORPORATION
CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
(In thousands except per share amounts)
Three Months Ended
-----------------------------
March 31, March 26,
1996 1995
----------- -----------
Revenues:
Motor fuels (Includes excise taxes of
approximately $37,339 and $30,739
for the three month 1996 and 1995
periods, respectively) $ 118,665 $ 95,038
Convenience store 72,801 50,959
Other income, net 3,294 2,405
---------- ----------
194,760 148,402
---------- ----------
Cost and Expenses:
Cost of sales:
Motor fuels 107,336 83,064
Convenience store 51,363 34,832
Operating expenses 28,394 20,542
Selling, general and administrative
expenses 6,120 5,763
Depreciation and amortization 3,385 2,184
Interest expense 2,115 1,094
---------- ----------
198,713 147,479
---------- ----------
Income (loss) before income taxes (3,953) 923
Income tax expense (benefit) (127) -
Provision (benefit) in lieu of taxes (1,257) 314
---------- ----------
Net income (loss) $ (2,569) $ 609
========== ==========
Primary earnings (loss) per common
and common equivalent share $ (.04) $ .01
========== ==========
Fully diluted earnings (loss) per
common and common equivalent share $ (.04) $ .01
========== ==========
Weighted average common and common
equivalent shares outstanding:
Primary 67,860,357 76,947,747
========== ==========
Fully diluted 67,860,357 78,126,785
========== ==========
The accompanying Notes to Consolidated Financial Statements
are an integral part of these Statements
5
E-Z SERVE CORPORATION
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
(Unaudited)
(In thousands)
Additional Retained
Preferred Common Paid-In Earnings
Stock Stock Capital (Deficit) Total
--------- ------- --------- --------- -------
Balance, December 25, 1994 $ 1 $ 673 $52,932 $ 8,969 $ 62,575
Net income - - - 5,264 5,264
Exercise of stock options - 1 5 - 6
Deferred compensation-
stock options - - 188 - 188
Conversion of Series C
Preferred Stock to
Common Stock - 5 (5) - -
Series C Preferred Stock
Dividend - - 1,093 (1,093) -
Provision in lieu of taxes - - 2,127 - 2,127
------ ------- ------- ------- -------
Balance, December 31, 1995 1 679 56,340 13,140 70,160
Net loss - - - (2,569) (2,569)
Exercise of stock options - - 5 - 5
Deferred compensation -
stock options - - 36 - 36
Provision in lieu of taxes - - (1,257) - (1,257)
------ ------ ------- ------- -------
Balance, March 31, 1996 $ 1 $ 679 $55,124 $10,571 $ 66,375
====== ===== ======= ======= ========
The accompanying Notes to Consolidated Financial Statements
are an integral part of these Statements.
6
E-Z SERVE CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
(In thousands)
Three Months Ended
----------------------
March 31, March 26,
1996 1995
--------- ---------
Cash flows from operating activities:
Net income (loss) $ (2,569) $ 609
Adjustments to reconcile net income (loss)to net
cash used in operating activities:
Depreciation and amortization 3,528 2,184
Gain on sale of assets (12) (13)
Payments for environmental remediation (447) (112)
Payments for removal of underground storage tanks (179) (48)
Provision in lieu of taxes (1,257) 314
Stock option expense 36 48
Changes in assets and liabilities:
Increase in accounts and notes receivable (467) (2,354)
Decrease in inventory 743 2,871
Decrease in prepaid expenses and other 326 291
Increase (decrease) in accounts payable and accruals (4,956) 548
Proceeds from environmental settlement - 3,377
Other - net (481) (465)
------- --------
Net cash provided (used) by operating activities (5,735) 7,250
------- --------
Cash flows from investing activities:
Proceeds from sale of assets 151 149
Payment for purchase of companies
net of cash acquired - (34,574)
Capital expenditures and other asset additions (3,972) (1,718)
------- --------
Net cash used by investing activities (3,821) (36,143)
------- --------
Cash flows from financing activities:
Proceeds from long-term debt 5,200 45,000
Repayment of long-term debt (2,057) (13,855)
------- --------
Net cash provided by financing activities 3,143 31,145
------- --------
Net increase (decrease) in cash and
temporary investments (6,413) 2,252
Cash and temporary investments at
beginning of period 15,759 12,963
------- --------
Cash and temporary investments at end of period $ 9,346 $ 15,215
======= ========
Supplement cash flow information:
Net cash paid during the period for:
Interest $ 2,064 $ 485
Income taxes - -
The accompanying Notes to Consolidated Financial Statements
are an integral part of these Statements.
7
E-Z SERVE CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
(Dollars in Thousands)
NOTE (1) BASIS OF PRESENTATION
- - ------------------------------
The consolidated financial statements presented herein include the accounts of
E-Z Serve Corporation and its wholly-owned operating subsidiaries, E-Z Serve
Convenience Stores, Inc. ("EZCON") and E-Z Serve Petroleum Marketing Company
("EZPET"). The Statements of Operations include the results of Time Saver
Stores, Inc. ("Time Saver") since January 17, 1995 and Sunshine-Jr. Stores
Inc. ("SJS") since July 20, 1995. On March 31, 1995, Time Saver was merged
into EZCON and on October 2, 1995 SJS was merged into EZCON. Unless the
context indicates to the contrary, the term of "Company" as used herein should
be understood to include subsidiaries of E-Z Serve Corporation and predecessor
corporations.
The accompanying unaudited condensed consolidated financial statements have
been prepared in accordance with generally accepted accounting principles for
interim financial information and with the instructions to Form 10-Q and
Article 10 of Regulation S-X. Accordingly, they do not include all of the
information and footnotes required by generally accepted accounting principles
for complete financial statements. In the opinion of management, all
adjustments (consisting only of normal recurring accruals) considered
necessary for a fair presentation have been included. Operating results for
the three month period ended March 31, 1996 are not necessarily indicative of
the results that may be expected for the year ended December 29, 1996. It is
suggested that these condensed consolidated financial statements be read in
conjunction with the consolidated financial statements and the notes thereto
included in the Company's annual report on Form 10-K for the year ended
December 31, 1995.
Certain items in the March 26, 1995 consolidated financial statements have
been reclassified to conform with the presentations in the March 31, 1996
consolidated financial statements.
NOTE (2) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
- - ---------------------------------------------------
Reference is made to the Notes to Consolidated Financial Statements included
in the Company's annual report on Form 10-K for the year ended December 31,
1995.
The computation of earnings per common share is based upon the weighted
average number of common shares outstanding during the period plus (in periods
in which they have a dilutive effect) the effect of common equivalent shares
arising from convertible preferred stock using the if-converted method and
dilutive stock options and warrants using the treasury stock method. During
the quarter ended March 31, 1996, Common Stock Equivalents were not included
in per share calculations (they were antidilutive) and net income attributable
to common stock was reduced by unpaid dividends on preferred stock of $113.
For the quarter ended March 26, 1995 the Company had average outstanding
Common Stock Equivalents of 9,309,685 for primary earnings per share and
8
E-Z SERVE CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Unaudited)
(Dollars in Thousands)
10,488,723 for fully diluted earnings per share which relate to its Series C
Convertible Preferred Stock, its 1991 Stock Option Plan, its 1994 Stock Option
Plan and warrants issued as part of the April, 1993 debt restructuring.
NOTE (3) BUSINESS ACQUISITIONS
- - ----------------------------------
Time Saver - On January 17, 1995, the Company, through its wholly-owned
subsidiary EZCON, acquired all of the capital stock of Time Saver from Dillon
Companies, Inc. At the date of acquisition, Time Saver operated 102 and
franchised 14 convenience stores in the New Orleans, Louisiana area, and was
the dominant independent convenience store chain in New Orleans. Under the
terms of the agreement with the seller, EZCON made a payment at closing of
$29,960 for the properties and, based on Time Saver's closing balance sheet,
made an additional payment of $7,000 on February 28, 1995 for the nonproperty
net assets. The Company financed the transaction through a new Credit and
Guaranty Agreement with a group of banks (See Note 5 - Long Term Obligations
and Credit Arrangements). On March 31, 1995, Time Saver was merged into
EZCON.
SJS - On June 15, 1995, the Company, its wholly-owned subsidiary EZS
Acquisition Corporation ("EZS") and SJS entered into an Agreement and Plan of
Merger whereby EZS agreed to make a tender offer for all 1,701,650 outstanding
shares of common stock of SJS at $12.00 per share net to the sellers in cash
for an aggregate purchase price of $20,420. The tender offer expired on July
20, 1995, which was the effective date of the acquisition. Effective July 21,
1995, EZS merged with and into SJS thereby converting all shares of SJS not
tendered into the right to receive $12.00 per share, net in cash. At such
time, SJS became a wholly-owned subsidiary of the Company. At the date of
acquisition, SJS operated 205 convenience stores in five states with 120 of
the stores in Florida, 52 stores in Alabama, 27 stores in Mississippi, 5
stores in Georgia, and 1 store in Louisiana. EZS obtained the funds necessary
for the acquisition from a capital contribution by the Company. The Company,
through its subsidiary EZCON, obtained $15,400 of the acquisition price
pursuant to an amendment to its Credit and Guaranty Agreement (See Note 5 -
Long-Term Obligations and Credit Arrangements) with the remainder coming from
funds generated internally by the Company and its subsidiaries. On October 2,
1995, SJS was merged into EZCON.
9
E-Z SERVE CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Unaudited)
(Dollars in Thousands)
NOTE (4) QUASI-REORGANIZATION
- - -----------------------------
With the acquisitions of Taylor Petroleum, Inc. and EZCON in 1992, and with
the April 21, 1993 debt restructuring, the Company was recapitalized and its
primary business changed from that of a gasoline marketer to a convenience
store operator. Accordingly, effective March 28, 1993, the Company's Board of
Directors authorized management to effect a quasi-reorganization. In this
regard, the Company recognized a write down of $12,997 in the value of
management information systems, convenience stores assets, securities of
related parties, and the future liabilities associated with the Marketer
locations.
As part of the quasi-reorganization, the deficit in retained earnings was
eliminated against additional paid-in capital. Retained earnings in the
future will be dated to reflect only the results of operations subsequent to
March 28, 1993. Any future tax benefits of operating loss and tax credit
carryforward items which arose prior to the quasi-reorganization will be
reported as a direct credit to paid-in capital. During the first quarter of
1996 the Company recorded a benefit for these carryforward items since the
Company anticipates a net profit position for fiscal 1996.
NOTE (5) LONG-TERM OBLIGATIONS AND CREDIT ARRANGEMENTS
- - ------------------------------------------------------
Long-term obligations consist of the following:
March 31, December 31,
1996 1995
--------- ------------
Revolving lines of credit payable to banks $ 5,200 $ -
Term notes payable to banks 78,000 80,000
Current portion (7,100) (5,550)
-------- --------
76,100 74,450
-------- --------
Note payable to major stockholder 25 25
Current portion - -
-------- --------
25 25
-------- --------
Capital lease obligations 1,512 1,557
Current portion (180) (168)
-------- --------
1,332 1,389
-------- --------
Long-term obligation - other 382 394
Current portion (78) (6)
-------- --------
304 318
-------- --------
Total long-term obligations $ 77,761 $ 76,182
======== ========
10
E-Z SERVE CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Unaudited)
(Dollars in Thousands)
NOTE (5) LONG-TERM OBLIGATIONS AND CREDIT ARRANGEMENTS (Continued)
- - ------------------------------------------------------------------
On January 17, 1995, EZCON entered into a Credit and Guaranty Agreement
("C & G Agreement") with a group of banks (the "Lenders") with Societe
Generale as Agent. The C & G Agreement replaced the credit facilities
previously utilized by the Company. The C & G Agreement provided for a term
loan of $45,000 ("Term Loan") and a $15,000 revolving line of credit
("Revolver"). At closing, the Term Loan was fully drawn and the proceeds were
used (a) to repay in full the outstanding amounts owed under the previous
credit agreement, (b) to finance the initial payment for the Time Saver
acquisition, and (c) for working capital purposes. On July 21, 1995 the C & G
Agreement was amended whereby the Lenders increased the Term Loan available to
the Company to $60,400. The Company fully drew the additional $15,400 and the
proceeds were used for the acquisition of SJS.
With the acquisition of SJS, the Company assumed the indebtedness of SJS
which, at July 21, 1995, consisted of (as defined by the SJS Plan of
Reorganization) notes payable to holders of Class 7 General Unsecured Claims
of $13,962, notes payable to holders of Class 2 Priority Tax Claims of $2,789
and notes payable for the purchase of 10 previously leased stores of $2,409.
On October 2, 1995, the Amended and Restated Credit and Guaranty Agreement
("Amended C & G Agreement") was entered into and the Term Loan limit was
increased to $80,000, the Revolver limit was increased to $25,000 and the
letter of credit sublimit was increased to $15,000. The Company fully drew
the additional $19,600 available on the Term Loan and used the proceeds to
retire all of the outstanding debt of SJS. Concurrently with the signing of
the Amended C & G Agreement SJS was merged into EZCON.
The Term Loan matures on January 24, 2002, and the Revolver matures on January
24, 1998. Both loans bear interest, payable quarterly at the prime rate plus
1.25%, and, with proper notice to the Agent, both can be converted to LIBOR
loans at LIBOR plus 2.5%. During the first quarter of 1996, the Term Loan was
converted to a LIBOR loan at the average interest rate of 8.13%.
The Amended C & G Agreement requires that a notional amount of at least
$20,000 of the Term Loan be rate protected, as defined, through January 17,
1998. In this regard, the Company entered into a three-year interest rate
swap in the notional amount of $20,000. The swap agreement is a contract to
exchange floating interest rate payments for fixed rate payments without the
exchange of the underlying notional amount. The notional amount is used to
measure interest to be paid or received and does not represent an exposure to
credit loss. The swap agreement effectively changes $20,000 of the Company's
Term Loan to a fixed rate of 9.345% through April, 1998.
The Company made a $2,000 principal payment in January 1996 and the Term Loan
requires additional semi-annual principal payments each January 24 and July
24, as follows: $3,550 in July 1996 and January 1997; $4,820 in July 1997;
$5,780 in January 1998; $6,280 in July 1998; $6,670 in January 1999; $6,920 in
July 1999; $7,110 in January and July 2000 and January 2001; $7,600 in July
2001; with a final payment of $11,500 in January 2002. The Amended C & G
11
E-Z SERVE CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Unaudited)
(Dollars in Thousands)
NOTE (5) LONG-TERM OBLIGATIONS AND CREDIT ARRANGEMENTS (Continued)
- - ------------------------------------------------------------------
Agreement further states that 100% of certain transaction proceeds, as
defined, shall be immediately applied as a mandatory prepayment of the Term
Loan in the inverse order of maturity, and further, that 75% of excess cash
flow, as defined, shall be applied 90 days after the end of each fiscal year
as a mandatory prepayment of the Term Loan in the inverse order of maturity.
The Revolver can be used for working capital purposes and for issuance of a
maximum of $15,000 of letters of credit. The Revolver has a "clean-down"
provision whereby, during a five consecutive calendar day period of each
calendar month, the aggregate outstanding borrowing cannot exceed $4,000. At
March 31, 1996, there were $5,200 of outstanding borrowings under the Revolver
and there was $8,199 of outstanding letters of credit issued as collateral for
disputed unsecured bankruptcy-related claims, workers compensation claims, and
money orders sold by the Company.
The Term Loan and Revolver are secured by the Company's pledge of all of the
capital stock of its subsidiaries and by guaranties from EZPET. Further, the
Amended C & G Agreement grants the Lenders, among other things, a security
interest in all of the Company's equipment, inventories and receivables, and a
right to instigate a springing lien, as defined, on all of the Company's real
property, fixtures, buildings and improvements, if certain events, including
any event of default, should occur. Provisions of the Amended C & G Agreement
require the Company to remain within the limits of certain defined financial
covenants, and impose various restrictions on distributions, business
transactions, contractual obligations, capital expenditures and lease
obligations.
On March 31, 1996, the Company was required to make an excess cash flow
payment of $1,619 based on cash flow for the year ended December 31, 1995.
The Company requested from the bank group, and was granted, a waiver of this
payment. In addition, due to lower than anticipated gross profit margins on
motor fuel sales during the first quarter of 1996, the Company was not, as of
March 31, 1996, in compliance with certain financial covenants of the Amended
C & G Agreement and the "clean-down" provision. The bank group provided the
Company with waivers for these violations and the springing lien until April
30, 1996. On May 6, 1996 an amendment to the Amended C & G Agreement was
signed whereby various financial covenants for all reporting periods were
revised through the term of the loan except for the fixed charge coverage
ratio which was revised through fiscal 1996. The Company expects to remain in
compliance with these revised financial covenants.
12
E-Z SERVE CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Unaudited)
(Dollars in Thousands)
NOTE (6) COMMITMENTS AND CONTINGENCIES
- - --------------------------------------
The Environmental Protection Agency issued regulations in 1988 that
established requirements for underground storage tanks that affect various
aspects of the Company's retail motor fuel operations. The regulations
require assurances of insurance or financial responsibility and will require
the Company to upgrade or replace a certain number of its underground storage
tanks. The Company has elected to self-insure under these regulations. The
Company currently estimates that the future cost of complying with these
regulations and performing remediation on contaminated sites will be
approximately $54,150. The $54,150 consists of $43,706 for anticipated
remediation costs; $8,753 for environmental capital improvements, and $1,691
for tank removal costs. At March 31, 1996 the Company had completed the
necessary remediation and had filed claims totaling $8,248 with the various
states in which it operates. Of the $43,706 gross remediation liability, the
Company expects additional future reimbursements from state trust funds of
$38,091.
Such estimates are based on current regulations, historical results,
assumptions as to the number of tanks to be replaced and certain other
factors. The actual cost of remediating contaminated sites and removing tanks
may be substantially lower or higher than reserved due to the difficulty in
estimating such costs and due to potential changes in regulations or state
reimbursement programs.
13
E-Z SERVE CORPORATION
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Item 2.Management's Discussion and Analysis of Financial
-------------------------------------------------
Condition and Results of Operations.
------------------------------------
The following is Management's discussion and analysis of certain significant
factors which have affected the Company's results of operations and balance
sheet during the period included in the accompanying consolidated financial
statements. Operating data is presented below:
Results of Operations
-------------------------------------
(In thousands except store counts, per gallon prices and margins)
Three Months Ended
--------------------------
March 31, March 26,
1996 1995
---------- ----------
CONVENIENCE STORE OPERATIONS (1)
- - -------------------------------
Merchandise:
Average number of merchandise stores
during the period 738 512
Merchandise sales $ 72,801 $ 50,959
Merchandise sales per location per month $ 32.9 $ 33.2
Gross profit $ 21,438 $ 16,127
Gross profit per location per month $ 9.7 $ 10.5
Gross profit percentage 29.45% 31.65%
Motor Fuels:
Average number of motor fuel stores
during the period 693 471
Gallons sold 93,953 72,515
Gallons sold per location per month 45.2 51.3
Revenues $ 101,362 $ 75,990
Price per gallon $ 1.079 $ 1.048
Gross profit $ 9,650 $ 9,571
Gross profit per gallon $ 0.1027 $ 0.1320
Gross profit per location per month $ 4.6 $ 6.8
14
E-Z SERVE CORPORATION
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS (Continued)
Results of Operations (Continued)
-------------------------------------
(In thousands except store counts, per gallon prices and margins)
Three Months Ended
-------------------------
March 31, March 26,
1996 1995
---------- ----------
MARKETER OPERATIONS (2)
- - -----------------------
Average number of operating locations
during the period 200 236
Gallons sold 15,660 17,362
Gallons sold per location per month 26.1 24.5
Revenues $ 17,303 $ 19,048
Price per gallon $ 1.105 $ 1.097
Gross profit (3) $ 1,679 $ 2,403
Gross profit per gallon $ 0.1072 $ 0.1384
Gross profit per location per month $ 2.8 $ 3.4
(1) At March 31, 1996, there were 733 Company operated convenience stores
(679 of which sold motor fuels) and 11 franchised convenience stores.
(2) Represents non-company operated motor fuel retail outlets.
(3) Gross profit is shown before deducting compensation paid to operators of
locations not operated by the Company of $866,000 and $1,049,000 for the
three months ended March 31, 1996 and March 26, 1995, respectively.
15
E-Z SERVE CORPORATION
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS (Continued)
Overview
- - --------
The Company reported a net loss of $2,569,000 and net income of $609,000 for
the three month periods ended March 31, 1996 and March 26, 1995, respectively.
All major components of income, including revenues, gross profit and operating
expenses, increased in the 1996 period due to the acquisitions of Time Saver
and SJS during 1995.
Operating Gross Profit
- - ----------------------
Convenience store merchandise sales increased 42.9% in the first quarter of
1996 compared to the first quarter of 1995; but the 1996 merchandise sales per
location decreased 0.9% from the 1995 quarter. The increase in total sales is
due to the higher number of operating locations with the 1995 additions of
Time Saver and SJS. The decrease in sales per location is primarily due to
unfavorable weather conditions in the Company's marketing area and due to the
Company's previous pricing policy which had favored margin over sales. For
the first quarter of 1996, merchandise revenue comprised 37.4% of the
Company's total revenue as compared to 34.3% for the first quarter of 1995.
The merchandise gross profit margin decreased to 29.45% in the 1996 quarter
from 31.65% in the 1995 quarter. This margin decrease is principally due to a
recent change in pricing strategy intended to increase customer traffic and
boost sales.
While the average number of convenience stores that retail motor fuels
increased 47.1% (due to the Time Saver and SJS acquisitions) in the first
quarter of 1996 compared to the first quarter of 1995, the total gallons sold
increased only 29.6%. Gallons sold per location were down 11.9% for the first
quarter of 1996 versus the first quarter of 1995 largely because Time Saver
and SJS sales per location are lower than the Company's previous average.
Gross profit per gallon decreased 2.93 cents in the 1996 period from 13.20
cents in the first quarter of 1995 due to unfavorable market conditions
related to reduced availability of motor fuel supply which has caused the
Company's cost of product to increase by more than market conditions have
allowed selling prices to increase.
Total Marketer gallons sold decreased 9.8% for the first quarter of 1996
versus the first quarter of 1995. The volume decline is principally due to a
15.3% decrease in the average number of operating locations as the Company
continues to dispose of or close under-performing locations. The decrease in
gross profit per gallon from 13.84 cents in the first quarter of 1995 to 10.72
cents for the first quarter of 1996 is due to the same unfavorable market
conditions described above.
16
E-Z SERVE CORPORATION
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS (Continued)
Other Income
- - ------------
Other income (which includes money order sales income, gross profit from the
sale of lottery tickets, telephone commissions, rental income, interest
income, franchise fee income and other) increased 37.0% in the three months
ended March 31, 1996 as compared to the first quarter of 1995. This increase
is primarily due to the Time Saver and SJS acquisitions and is consistent with
the increased number of locations operated during the 1996 quarter.
Expenses
- - --------
Total operating expenses increased by 38.2% percent for the three month period
of 1996 as compared to the same period in 1995, again due to the increase in
the number of operating locations. Operating expenses, as a percent of total
revenues, were slightly above the first quarter of 1995 due to an increased
proportion of revenues being derived from merchandise sales at company
operated convenience stores. Operating expenses, as a percent of merchandise
revenue, were 39.0% and 40.3% for the first quarters of 1996 and 1995,
respectively.
Although Selling, General and Administrative, ("S,G&A"), expenses for the
three months of 1996 increased $357,000 compared to the first three months of
1995, as a percent of revenue, S,G&A expenses decreased from 3.9% in the first
quarter of 1995 to 3.1% in the first quarter of 1996.
Depreciation and amortization expense increased for the three months of 1996
versus 1995 by 55.0% due primarily to the SJS acquisition and, to a lesser
extent, to the capital additions made during 1995.
Interest expense increased $1,021,000 for the three months ended March 31,
1996, as compared to the same 1995 period, due to the increased level of
borrowings as the Company increased its bank debt in 1995 to acquire Time
Saver and SJS.
Inflation
- - ---------
The Company believes inflation has not had a material effect on its results of
operations. The Company does, however, experience short term fluctuations in
its motor fuel gross profit margins as a result of changing market conditions
for the supply and demand of gasoline.
17
E-Z SERVE CORPORATION
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS (Continued)
Liquidity and Capital Resources
- - -------------------------------
The following table sets forth key balance sheet amounts and corresponding
ratios for periods included in the accompanying consolidated financial
statements:
March 31, December 31,
1996 1995
----------- ------------
Current assets $71,569,000 $78,584,000
Current liabilities $73,544,000 $76,936,000
Current ratio 0.97:1 1.02:1
Long-term debt (including related
parties and other $77,761,000 $76,182,000
Stockholders' equity $66,375,000 $70,160,000
Long-term debt to equity ratio 1.17:1 1.09:1
Common shares outstanding 67,866,159 67,854,159
Liquidity
- - ---------
As of March 31,1996, EZCON had $11,601,000 available on its bank line of
credit. Due to the nature of the Company's business, most sales are for cash,
and cash provided by operations is the Company's primary source of liquidity.
Receivables relate to undeposited sales by Marketers, credit card and lottery
sales, manufacturer rebates and other receivables. In addition, the Company
finances its inventory requirements primarily though normal trade credit
terms. This condition allows the Company to operate with a low level of cash
and working capital. The Company's working capital decreased $3,623,000
during the first quarter of 1996 primarily due to the $2,000,000 principal
payment on the Term Loan and an increase in the current portion of long-term
debt.
During the first quarter of 1996, the Company's major non-operational cash
proceeds were proceeds from temporary borrowings on the Revolver, as defined
below, of $5,200,000. Major non-operational expenditures included: $2,057,000
for the repayment of long-term debt; $3,972,000 for capital and environmental
upgrade expenditures; $447,000 for environmental remediation and $179,000 for
removal of underground storage tanks.
Approximately 61% of the Company's revenues are derived from motor fuel sales
and, because the Company acquires approximately 35% of its product on a spot
basis, gross margins are subject to sudden changes whenever a disproportionate
movement between purchase costs and retail selling prices occurs. Frequently,
these movements are not in line with each other which leads to unusually wide
or narrow margins. Without stability in the marketplace, the Company may
temporarily experience operating results that are unprofitable.
18
E-Z SERVE CORPORATION
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS (Continued)
The Company believes that cash flow from operations and available working
capital will provide the Company with sufficient liquidity to conduct its
business in an ordinary manner. However, unanticipated events or a prolonged
motor fuel margin squeeze could occur which may cause cash shortfalls to exist
and require the Company to increase its borrowing on the revolving line of
credit.
Capital Resources
- - -----------------
As discussed in Note 5 - Long-Term Obligations and Credit Arrangements in the
Notes to Consolidated Financial Statements, on January 17, 1995, EZCON entered
into a Credit and Guaranty Agreement ("C & G Agreement") with a group of banks
(the "Lenders") with Societe Generale as agent (the "Agent"). The C & G
Agreement provided for a term loan of $45,000,000 ("Term Loan") and a
$15,000,000 revolving line of credit ("Revolver"). At closing, the Term Loan
was fully drawn and the proceeds were used (a) to repay in full the
outstanding amounts owed under the Company's previous credit agreement, (b) to
finance the initial payment for the Time Saver acquisition and (c) for working
capital purposes. On July 21, 1995, the C & G Agreement was amended whereby
the Lenders increased the Term Loan available to the Company to $60,400,000.
The Company fully drew the additional $15,400,000 and the proceeds were used
for the acquisition of SJS. With the acquisition of SJS, the Company assumed
the indebtedness of SJS. On October 2, 1995, the C & G Agreement was amended
and restated ("Amended C & G Agreement"). The Term Loan limit was increased
to $80,000,000 and the Revolver limit was increased to $25,000,000. The
Company drew the additional $19,600,000 available on the Term Loan and used
the proceeds to retire the outstanding debt of SJS.
The Company made a $2,000,000 principal payment in January 1996 and the Term
Loan requires additional semi-annual payments each January 24 and July 24, as
follows: $3,550,000 in July 1996 and January 1997; $4,820,000 in July 1997;
$5,780,000 in January 1998; $6,280,000 in July 1998; $6,670,000 in January
1999; $6,920,000 in July 1999; $7,110,000 in January and July 2000 and January
2001; $7,600,000 in July 2001; with a final payment of $11,500,000 in January
2002. The Amended C & G Agreement further states that 100% of certain
transaction proceeds, as defined, shall be immediately applied as a mandatory
prepayment of the Term Loan in the inverse order of maturity, and further,
that 75% of excess cash flow, as defined, shall be applied 90 days after the
end of each fiscal year as a mandatory prepayment of the Term Loan in the
inverse order of maturity.
The Revolver can be used for working capital purposes and for issuance of a
maximum of $15,000,000 of letters of credit. The Revolver has a "clean-down"
provision whereby, during a five consecutive calendar day period of each
calendar month, the aggregate outstanding borrowing cannot exceed $4,000,000.
On March 31, 1996, the Company was required to make an excess cash flow
payment of $1,619,000 based on cash flow for the year ended December 31, 1995.
The Company requested from the bank group, and was granted, a waiver of this
payment. In addition, due to lower than anticipated gross profit margins on
motor fuel sales during the first quarter of 1996, the Company was not, as of
19
E-Z SERVE CORPORATION
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS (Continued)
March 31, 1996, in compliance with certain financial covenants of the Amended
C & G Agreement and the "clean-down" provision. The bank group provided the
Company with waivers for these violations and the springing lien until April
30, 1996. On May 6, 1996 an amendment to the Amended C & G Agreement was
signed whereby various financial covenants for all reporting periods were
revised through the term of the loan except for the fixed charge coverage
ratio which was revised through fiscal 1996.
The Company's ability to expand further is dependent upon several factors,
including adequacy of acquisition opportunities and sufficient capital
resources. The Company believes that possible acquisition candidates will
continue to exist as the major oil companies reevaluate and reduce their
company operated presence, as the convenience store industry continues to
contract due to competitive pressures and the financial difficulties
experienced by some of its members, and as small independent operators have
difficulty meeting growing environmental requirements. While cash flow and
capital availability are currently sufficient to fund operations, it will be
necessary for the Company to fund any identified acquisitions with new capital
which may not be available on terms acceptable to the Company. Although it is
the Company's intention to grow through strategic acquisitions, recent
acquisitions in the convenience store industry have caused the Company to
evaluate, preliminarily, various alternatives to maximize stockholder value.
In connection therewith, the Company has engaged Donaldson, Lufkin & Jenrette
Securities Corporation to act as the Company's exclusive financial advisor in
connection with such efforts for which it shall be compensated based on a
percentage of the dollar value of a chosen alternative, if any, and shall be
reimbursed for out-of-pocket expenses.
Under federal tax law, the amount and availability of net operating loss
carryforwards ("NOL") are subject to a variety of interpretations and
restrictive tests, under which the utilization of such NOL carryforwards could
be limited or effectively lost upon certain changes in ownership. After an
ownership change, utilization of a loss corporation's NOL was limited annually
to a prescribed rate times the value of a loss corporation's stock immediately
before the ownership change. During 1992, the Company experienced an
"ownership change" as defined by the Internal Revenue Code of 1986. The
Company's NOL available under the ownership change rules was approximately
$34,000,000 at December 31, 1995. The NOL will expire if not utilized by
2006. Approximately $17,000,000 of the NOL was acquired with the acquisition
of EZCON and can only be used to offset future income of EZCON. In addition,
the Company has alternative minimum tax NOL carryforwards of approximately
$34,000,000, which are available over an indefinite period, that can be
utilized should the Company's alternative minimum tax liability exceed its
regular tax liability.
The Environmental Protection Agency requires that facility owners test
underground tanks for leaks and repair or replace leaking tanks with new or
upgraded corrosion protected tanks. The Company currently estimates that
complying with these regulations will cost an additional $16,059,000 (net of
anticipated reimbursements from state environmental trust funds), through
1998. This estimate is based upon assumptions as to the number of tanks to be
replaced and certain other factors. The assumptions on which the cost
20
E-Z SERVE CORPORATION
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS (Continued)
estimates are based may not materialize, and unanticipated events and
circumstances may occur. As a result, the actual cost of complying with these
requirements may be substantially lower or higher than the estimated costs.
The Company anticipates that required expenditures relating to compliance with
these regulations will be funded from cash flow from its current operations.
Due to capital constraints brought about largely by operating losses and by
the environmental expenditure requirements discussed above, the Company was
unable to properly upgrade its facilities prior to 1994. However, as a result
of improved operating results, during 1994 the Company began to make capital
expenditures and improvements beyond maintenance capital requirements. During
the first quarter of 1996 the Company made capital expenditures and
improvements of $3,098,000 (exclusive of environmental requirements). However,
according to the terms of the Amended C & G Agreement, if projected levels of
profitability are not maintained, the Company's capital expenditures can be
constrained. In this regard, based on reduced cash flow projections for 1996,
the Amendment to the Amended C & G Agreement signed on May 6, 1996 reduced the
level of allowed capital expenditures for 1996 from $18,800,000 to
$11,400,000. Although this curtailment will reduce the intended level of
higher return discretionary expenditures in 1996, the Company does not believe
this to be a significant impairment to its future earnings potential unless
the restrictions are imposed in future periods.
21
E-Z SERVE CORPORATION
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS (Continued)
PART II - OTHER INFORMATION
- - ---------------------------
Item 1 - Legal Proceedings
- - --------------------------
The Company and its subsidiaries are involved in various lawsuits incidental
to its businesses. The Company's internal legal counsel monitors all such
claims, the Company has accrued for those which it believes are probable of
payment. In management's opinion, an adverse determination against the
Company or any of its subsidiaries relating to these suits would not have a
material adverse effect on the Company and its subsidiaries, taken as a whole.
In the case of administrative proceedings related to environmental matters
involving governmental authorities, management does not believe that any
imposition of monetary sanctions would exceed $100,000.
Item 2 - Changes in Securities
- - ------------------------------
None.
Item 3 - Defaults Upon Senior Securities
- - ----------------------------------------
(b) Arrearage in the Payment of Dividends
During the three months ended March 31, 1996, the Company had outstanding
75,656 shares of its $6.00 Convertible Preferred Stock, Series C ("Series C
Preferred Stock"). As of April 1, 1996, which is the last dividend cumulation
date, the Company had cumulative but unpaid dividends on the Series C
Preferred Stock of $455,000.
Item 4 - Submission of Matters to a Vote of Security Holders
- - ------------------------------------------------------------
There were no matters submitted to a vote of security holders during the
quarter ended March 31, 1996.
Item 6 - Exhibits and reports on Form 8-K
- - -----------------------------------------
(a) Exhibits:
10.1 Amendment and Waiver No. 1 to Amended and Restated Credit and
Guaranty Agreement dated April 30, 1996, among E-Z Serve Convenience
Stores, Inc., the Company, the Lenders party thereto, and Societe
Generale, as agent for the Lenders.
27 Financial Data Schedule for the period ending March 31, 1996.
(b) The Company did not file any reports on Form 8-K during the three months
ended March 31, 1996.
22
E-Z SERVE CORPORATION
SIGNATURES
--------------
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
E-Z SERVE CORPORATION
---------------------
(Registrant)
Date: May 15, 1996 /s/ John T. Miller
------------ ------------------------------
John T. Miller
Senior Vice President
Chief Financial Officer
23